Central Banks’ Disparity Could Send the EUR to USD Crashing
The EUR to USD exchange rate could go below parity. All the stars are lining up perfectly for a much lower euro compared to the U.S. dollar. For those who are looking for the next big trade, EUR/USD could be it.
Investors must understand one big factor; there’s a huge disparity between the U.S. Federal Reserve and the European Central Bank (ECB), and that disparity is going to create a significant amount of volatility for the EUR/USD currency pair.
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As it stands, the Federal Reserve is focused on tighter monetary policy. It’s taking the “punch bowl,” away from the party. The Fed wants to raise interest rates (we could see a rate increase in few weeks and several in the coming year), and printing money is out of the question.
The ECB, on the other hand, remains adamant about easy money. It has implemented a negative-interest-rate policy and is in the midst of printing money. Mind you, there’s no clear plan in place as to when the ECB will move away from easy monetary policies. We know that money printing could stop sometime in 2017, but there are no guidelines on how long the negative interest rates could remain.
Looking at this, if you believe that the EUR to USD exchange rate will remain stable, you could be truly mistaken. This is basic economics here; what the Federal Reserve is doing will strengthen the dollar (and has done so before). What the ECB is doing will weaken the euro (and has done so before, as well).
From a technical analysis perspective, it looks like bearish sentiment prevails in the EUR/USD currency pair. Please look at the chart below.
Chart courtesy of StockCharts.com
There are three things that investors should be paying close attention to when looking at the EUR to USD exchange rate charts.
First, the EUR/USD currency fails to break above the 1.150 mark. This area has been tested roughly four times since early 2015. Last time the EUR to USD exchange rate even came close to 1.15 in mid-October, it catered. At the very core, this says a large number of sellers could be present in that area.
Second, pay attention to the 50-week moving average and the 200-week moving average. The EUR to USD exchange rate trades well below these moving averages. This essentially means that both the intermediate-term and the long-term trends are pointing downward. With this, you have to remember the most basic principle of technical analysts: trend is your friend.
Lastly, momentum on the EUR/USD currency pair—as evident by the moving average convergence/divergence (MACD) at the bottom of the above chart—is turning in favor of sellers. For the majority of 2015 and 2016, the momentum of the EUR to USD exchange was relatively neutral.
EUR to USD Outlook: Euro Setting Up To Disappoint
With all this said, how low could the EUR to USD exchange go?
I have said it before and I will say it again: the euro could go well below parity against the U.S. dollar. It wouldn’t be shocking if the EUR to USD exchange drops to as low as 0.82. I wrote about how one chart pattern suggests that the EUR/USD could drop immensely here: This Chart Pattern Says EUR/USD Could Go Below Parity.
It wouldn’t be shocking if the move to the downside on the EUR/USD exchange escalates as the Federal Reserve raises rates in December, and—as expected—it increases them several times in 2017.
